Small Investors’ FOREX Trading
Daily we hear of how successfully or unsuccessfully large institutional investors
have been in their trading in the world’s major currencies. Nightly we are given
an insight into how much can be made or lost simply by knowing whether a
currency is going to appreciate or depreciate against another currency. What is
less well known, however, is that the large number of small investors who can
also make a profit out of FOREX trading – if they know what they are doing!
Picking a strategy to trade in FOREX is not as easy as may first appear. As any
long-term investor in FOREX will be able to tell you, unlike other types of
investments the underlying factors behind trading in foreign currencies can
change very quickly and, at first glance, on issues that appear to have little to do
with a foreign currency. For example, a change in the oil or gold price can have
a significant impact on a currency. As such, as a small investor trading in
FOREX, you need to make sure that you have in place a proven foreign
exchange trading strategy.
Essentially, foreign exchange trading strategies rely on two aspects. Firstly, most
veteran traders will have in place a reliable foreign exchange trading software
package, which will assist them in trying to determine which way a currency is
likely to move. Secondly, in the case of most small investors, traders will have in
place one of the following three types of FOREX trading systems: a bullish
system, a bearish system and, in some cases, a hedge system.
With a bullish system, you are betting that your base currency is going to
appreciate over time against a counter-part currency.
A bearish system is a bullish system in reverse, i.e. you think the base currency is going to decline over
time. So, for example, if you think, over a period of time, the Euro is going to
strengthen against the Dollar, then you would be selling Dollars and buying Euro
– and you would be a bullish the Euro. On the other hand, if you think the Dollar
is going to appreciate against the Euro, you would be selling Euro and buying
Dollars – and you would be bearish the Euro (which would be your base currency
in this scenario).
Hedging, however, is not like either of the two systems so far mentioned. In a
hedging system you want to hedge against the movements of your chosen
currencies by purchasing other foreign exchange linked instruments, such as
derivatives, in order to mitigate any loss you have with your base currency. As
hedging is a more technical type of FOREX trade, it is usually recommended you
discuss this type of trade with your financial advisor or broker first.
Because the world of FOREX trading appears to be the domain of large
institutional investors does not mean that it needs to be that way. Small investors
can successfully trade in foreign currencies and make a decent profit out of it. By
educating yourself on the various ways to successfully trade foreign currencies,
trading in FOREX can be a very useful addition to your long-term and short-term
investment strategy.
